New breed of developer-driven REIT set to outperform

The outlook for office property will remain flat, particularly as a spurt of new office supply could subdue rental growth in Sydney and Melbourne over the next four years, they said.

We acknowledge that these are not major traits of a traditional REIT, but [they are] definitely traits of a modern one.

Simon Chan and Lauren Berry

This, in turn, would make it more difficult for office-focused trusts like Dexus to find and buy under-priced buildings and emulate the past few years’ growth in values.

“We expect office owners will still benefit from fair fundamentals, but the momentum seen in the last two to three years will cool,” they said.

The analysts were still bearish on the retail sector despite an investor skew towards office and industrial landlords making it a more attractive investment thesis.

Vicinity and Scentre Group have underperformed their REIT peers by about 19 per cent over the last one-and-a-half years and their 6 per cent dividend yields were “sector-leading”, they said.

Both stocks were trading at a circa 10 per cent discount to book value – good value on a metrics basis.

But nevertheless, “landlords have already lowered their rent outlook in the last three years, suggesting the market is still finding the bottom”.

As well, a fundamental re-rating was unlikely as malls were still under pressure from tenants and consumers.

“For this reason, we prefer stocks that profit from creating assets, rather than the ones recognised as pure asset owners – as the value uplift from here may be limited relative to the last two to three years,” they said.

Goodman, Mirvac, Lendlease and Charter Hall all have significant development pipelines and the ability to manufacture profits from both management and development fees.


As a result, they were likely to be relative outperformers in the sector.

“We acknowledge that these are not major traits of a traditional REIT, but [they are] definitely traits of a modern one,” they said.

“We see this as an attractive trait at a time when there is strong demand for good yielding assets.”

The traditional safe haven of retail rent was less predictable now than in the past.

Conversely, development profits/management fees – generally regarded as higher risk – were less so now given the transparency provided by Mirvac and Goodman’s strong track record with its capital partners, the bank said.

Stockland was the analysts’ preferred value, yield, bottom-of-cycle stock.

The residential-focused developer had performed “broadly in line” with the industry over last 18 months, despite being hampered by the residential downturn, and was due for an “upward re-rating”, they said.

Price falls in the residential housing market appear to have hit bottom.

“Stockland, in particular, is in a trough year of earnings, whilst trading at a low-mid cycle multiple – we think this is a strong value play and expect possible re-rating towards the upper end of its historical long-term range,” they said.

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